Exam 8: Aggregate Expenditure and Equilibrium Output

Explain the path to equilibrium when output is greater than planned spending.

Assume an economy in which saving is -$100 at an output level of zero and the slope of the saving schedule is 1/10. If the economy is in equilibrium at 1200 calculate the level of saving and investment

Define an exogenous variable.

-Assume the above consumption function for a hypothetical economy. Write out the algebraic equation for this function.

Fill in the table below assuming the consumption function has the following form: C = 500 + .9Y.

Suppose the slope of the consumption function is .75 and there was an increase in income of $100. Calculate the increase in consumption.

-Explain the meaning of the consumption function depicted above. Why is this consumption function unrealistic?

Assume that one day everyone decides to spend $100 more than they typically would. Explain why this would not necessarily result in an increase in income or output.

Write out the equation for the consumption function in algebraic form and identify each component.

Figure 23.1 -Using Figure 23.1 derive the equation for this consumption function.

Planned aggregate expenditure (AE) equals consumption plus planned investment: AE = C + I. Discuss the conditions under which equilibrium in the goods market is achieved.

Assume the level of saving that would take place in an economy is - $200 even when aggregate output is zero. Also assume that the marginal propensity to save is .1. Derive the algebraic expression for the saving function and the consumption function.

Define the multiplier.

Assume a consumption function of the form C = 200 + .8Y. Derive the saving function and write out the algebraic representation.

Explain how the following two equations can both be true: multiplier = 1/MPS multiplier = 1/(1 - MPC)

Assume consumption is represented by the following: C = 200 + .9Y. Also assume that planned investment (I) equals 300. (a) Now, suppose the level of income is equal to 4000. What is the level of planned aggregate expenditures at this level of income?What is the value of any unplanned changes in inventories? (b) Given the information, calculate the equilibrium level of income. (c) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income. (d) Suppose planned investment falls by 100. Graphically illustrate using the AE - Y graph the effects of this reduction in planned investment on the economy. Also, calculate the new level of equilibrium income. (a) AE = 200 + .9(4000) + 300 = 4100. Unplanned changes in inventories equal (b) Y = 5000 (c) C = 4700 and S = 300 (d) Y = 4000

Suppose that an economy is operating at equilibrium and for some reason households begin to save a smaller fraction of their income (the marginal propensity to save falls). How will this affect equilibrium output in the future when planned investment rises and falls?

Assume planned investment is $50 billion and the economy is currently operating at $7 trillion. Calculate the level of aggregate expenditures and unintended inventories if the consumption level is $6.9 Trillion.

Assume a hypothetical economy where all income is consumed. Theoretically what is the value of the income multiplier in this case?

Prove through the use of algebra that in a two sector economy saving must be equal to planned investment at the equilibrium level of output. (Hint: Remember that C + S = Y)